I am a partner of Riser Adkisson LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My practice is in the area of creditor-debtor law, and I am the author of books on asset protection and captive insurance. I have been an expert witness to the U.S. Senate Finance Committee, and am very active in the American Bar Association, and currently am the Chair of the Committee on Captive Insurance. I was also the collection attorney for the $20+ million judgment by the San Francisco Bay Guardian against the holding company of the Village Voice chain. I am serving as an American Bar Association adviser to the Uniform Law Commission's revisions of the Uniform Fraudulent Transfer Act and the new Series of Unimcorporated Business Entities Act.

Delaware Anti-Suit Injunction Nixed As To Dynasty Trust In Kloiber

But even if the Delaware court chose to act, that did not mean that the Kentucky court could not also act, so long as the Kentucky court’s rulings did not constitute any “undue interference” with Delaware’s jurisdiction over the Dynasty Trust. The bottom line is that both Delaware and Kentucky could have jurisdiction over the Dynasty Trust, so long as their respective orders did not interfere with those of the other court.

This was not to say, the Delaware court made clear, that at some future point the actions of Kentucky might rise to the level of “undue interference” such that the Delaware court would have to take greater action; but they were not there yet.

All of this brought the Delaware Court of Chancery to the issue of whether Nick could show sufficient irreparable harm that he would be entitled to the Anti-Suit Injunction. Nick argued:

(a) the Kentucky Family Court is attempting to coerce the Special Trustee to abandon his entitlement to have this Court hear all claims related to the administration of the Trust; (b) the Kentucky Family Court is attempting to coerce the Special Trustee to breach his fiduciary duties; (c) the Special Trustee has been denied due process in that a court that lacks jurisdiction over the Trust and its trustees is purporting to direct the administration of the Trust; (d) the Special Trustee’s constitutional right to travel has been improperly curtailed; and (e) the Special Trustee faces imminent and unquantifiable reputational harm.

The problem is, the Delaware court pointed out, Nick could seek relief in the Kentucky courts and thus he had an adequate remedy of law which negated his need for an injunction in equity. (In general, an equitable remedy such as an injunction is not available where the party seeking that remedy has an adequate remedy at law.) Moreover, if Nick felt that the Kentucky Family Court erred, then he could always appeal to a higher court in Kentucky.

The Delaware Court of Chancery next balanced the interests between the Delaware courts and the Kentucky courts, nothing that Kentucky had an interest in making sure that Dan’s and Beth’s marital assets were not dissipated before it could render its decision. Most importantly:

Certainly Delaware does not have an interest in interfering in the conduct of judicial proceedings in a sister state.

Further, the Kentucky Family Court could itself take actions to make sure that it did not infringe upon the jurisdiction of the Delaware courts, such as enforce the Status Quo Orders to restore Dan to the role of Special Trustee.

But there was a practical concern as well — while the Delaware courts could theoretically enjoin Beth from further participating in the Kentucky Family Court litigation, the Delaware courts have absolutely no power over the Kentucky Family Court itself, which would continue to hear the matter without Beth’s input:

Moreover, Nick concedes that any TRO this court might issue could not bind the Kentucky Family Court itself, which issued the Rule to Show Cause sua sponte. Other than potentially suggesting disrespect towards the Kentucky Family Court, the principal effect of a TRO would be to deprive the Kentucky Family Court of briefing from the parties who were restrained. For this judge, having briefing from all parties is helpful, and I assume that is true for the Kentucky Family Court as well. To my mind, the competing jurisdictional interests do not warrant issuing a TRO that might achieve at most the dubious goal of depriving the Kentucky Family Court of Beth’s input on the Rule to Show Cause.

Finally, the Delaware Court of Chancery considered the potential for long-term conflict between the Delaware and Kentucky courts, nothing that the potential was low. The Delaware court indicated that it would determine the validity of Dan’s resignation and Nick’s appointment as Special Trustee, in the light of being helpful to the Kentucky court in getting these issues resolved. But as to most other issues, the Delaware court would likely delay resolution until the Kentucky Family Court had reached a its judgment in that proceeding, as only then would certain of the issues be ripe for the Delaware court to determine — such as Beth’s enforcement of her judgment against the Dynasty Trust if it came to that.

The Delaware Court would wait in particular for a ruling from the Kentucky Family Court as to the precise nature of Dan’s interest in the Exstream stock, since:

The journey to a judgment-enforcement proceeding involves many intermediate steps that do not raise questions of Delaware law and should be completed first, because they will inform any decision this court might eventually be called upon to make. Most notably, a dispute presently exists over whether Dan held the property rights under Kentucky law that would form a prerequisite to his ability to transfer the Exstream shares to the Dynasty Trust. Beth maintains that the property Dan transferred constituted marital property in which she held an interest such that Dan could not unilaterally transfer it to the Dynasty Trust without her consent. If there is no dispute about the grantor’s title to the property placed in trust, then the question of what jurisdiction’s law applies to the transfer remains contestable, but a stronger argument can be made that the law governing the trust should determine the validity of the transfer and whether a creditor or other person can reach the property after it has been placed in the trust. By contrast, if there is a question about whether the grantor possessed the requisite property rights in the first place, the scope of the grantor’s property rights must be determined by the law governing those property rights, not the law selected to govern the trust.

To illustrate this proposition using an extreme and unrealistic hypothetical, assume that rather than contributing to the Dynasty Trust the Exstream shares over which Beth has a contestable claim, Dan instead surreptitiously removed a work of fine art from the wall of a neighbor’s house in Lexington, Kentucky, sent the painting to Delaware, and told PNC to hold it as part of the corpus of the Dynasty Trust. It would seem self-evident that under those circumstances, the neighbor could maintain an action against Dan in Kentucky to establish that the neighbor owned the artwork under Kentucky law, that Dan had no power to transfer the artwork to the Dynasty Trust as a matter of Kentucky law, and that the neighbor was entitled as a matter of Kentucky law to a remedy against Dan. Because Dan’s property rights in the artwork would be a necessary predicate to the validity of his transfer of the artwork to the trust, Kentucky law would govern the question of his property rights. The fact that Dan chose Delaware law in the Trust Agreement to govern (at least initially) the administration, construction, validity, and effectiveness of the Dynasty Trust would not cause Delaware law to trump whatever law controlled the question of Dan’s property rights vis-à-vis his neighbor. Nor could an exclusive forum provision in the Trust Agreement selecting the Court of Chancery force the neighbor to litigate the property rights issue in this court.

On this last note, the Delaware Court of Chancery denied Nick’s Application for a Temporary Restraining Order.

ANALYSIS

This was a very long, well-researched and thoughtful Opinion which I have just summarized. There are a lot of juicy nuggets in the Opinion that eluded my summary, and I commend readers to take the time to read the Opinion and its lengthy footnotes in its entirety. There should be some caution about relying on it, as it is both unpublished and subject to appeal.

There is one very basic takeaway from this case: A debtor should not rely on being able to “forum shop” to a jurisdiction where the laws might favor the debtor. As this case demonstrates, simply designating that the laws of Jurisdiction X will apply, doesn’t necessarily mean that the courts of Jurisdiction X will agree to interfere with the local courts where the primary dispute is taking place.

Here, Nick and PNC apparently believed that the Delaware courts really did have the exclusive jurisdiction, everywhere in the world, to handle any matter regarding Delaware Trusts. That belief was just vaporized megaton-style by the Delaware Court of Chancery, and anybody else who believes or pitches that nonsense had better take note.

The upshot is that asset protection planning had better work in every jurisdiction where that planning might reasonably be challenged, i.e., work under general principles of law common to all jurisdictions, and not just in reliance upon the special laws of some place.

There is an old saw among creditor’s rights attorneys that, “All collection law is local.” This means that in the judgment enforcement context, the local court where the judgment is rendered is very likely to apply its own, local law to attempts by creditors to collect against assets, and corresponding as unlikely to apply the laws of some other jurisdiction. This is due to the inherent procedural and non-substantive nature of judgment enforcement proceedings.

Another factor is that creditors, like Beth in this case, are typically not parties to the governing document of trusts and entities, and thus are not bound to their choice-of-law provisions. If a trust document or LLC operating agreement says that “only the laws of state X shall apply”, that is only binding on the parties who agree to it — but never nonconsensual creditors.

As the Court here points out, such provisions are also not operative or binding as to spouses who do not sign off on the critical operative documents like the Trust Agreement in this case. If somebody wants somebody else to be bound by a document, then they should get their signature on it. Trying to bind third-parties to terms in a document that they did not agree to is a fool’s pursuit.

Much more critically, it is not the proper office of asset protection planning or estate planning to cheat a spouse out of their fair share of marital assets. To even attempt to do so is reprehensible, and the bad people who try to do this (who of course always delude themselves that they are in the right), are usually surprised when the courts start hunting for exceptions to rules so that the cheated spouse can recover. Even if the planning did not start off with that purpose, to later use it for that purpose is equally reprehensive.

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